In the early 1980s, Michael Eugene Porter, an American academic and researcher on topics within economics and business, undertook research to study the behaviours of successful enterprises. He set out to find out how firms maintained success in the long term, and through this he came up with a set of strategies, called generic strategies, that businesses can employ in their operating models to remain ahead of the competition.
According to Mr. Porter, a firm can position itself within an industry by focusing on its strengths. He argued that these strengths are likely to be found in two areas: cost and differentiation. By focusing on these strengths in either a narrow or broad scope, the generic strategies become clear. These are cost leadership, differentiation and focus, with the focus strategy further broken down into differentiation focus and cost focus.
In the business world, having a competitive advantage enables a firm to perform better than its competitors. A competitive advantage can be a result of many factors, including access to raw materials, access to technology, a firm’s geographic location and the presence of highly skilled labour. Whatever the advantage, it has to be uniquely employed to ensure that a business can outperform the rest of the competition. Mr. Porter’s strategies, therefore, give entrepreneurs insight into how to use these advantages and create business models that make the most out of their strengths. Willah Joseph Mudolo, a seasoned business executive and co-founder of the ADF Group, enjoys reading Mr. Porter’s books and material on marketing.
The generic strategies are explained in detail below.
The cost leadership strategy highlights the need for a company to be the leader in its industry through cost. Merely being a low-cost producer is not enough, since other cheap manufacturers can undercut a firm’s prices and block its attempt to gain market share. Firms that choose this strategy have confidence in being able to achieve and maintain their top status in their respective markets.
The defining characteristics for companies that are good at cost leadership include having access to technology that helps to reduce costs, efficient logistics and access to raw materials and labour at low costs. The risk with selecting this route is that these sources are not unique to an individual company, and other competitors may just as easily copy the strategy and implement it.
While price is an important factor in any industry, the differentiation strategy calls on a company to develop services or products that have unique qualities that are held in high regard by customers. These attributes should also make customers perceive the service or product to be better than the firm’s competitors. Subsequently, a firm can charge a premium price for the product because of its unique attributes in the hope that the extra price can cover the costs of producing a unique offering.
Since the product itself is unique, an increase in production costs by suppliers can be passed on to the customers since the firm is confident that there isn’t a readily available substitute product. Firms that employ the differentiation strategy have some unique strengths, including the following:
- A skilled research and development (R&D) team or unit
- A motivated sales and marketing team that quickly and effectively conveys the product’s unique attributes
- A reputation for innovation and quality
The differentiation strategy doesn’t come without its risks, which include imitation by competitor firms and changes in customer preferences.
Firms that choose focus strategies concentrate on niche markets within their industries and, through a proper understanding of the market’s dynamics and the customers’ needs, develop well-specified or low-cost products. Since these firms are focused on serving their customers well, they tend to have loyal customers, a behaviour that deters competitors from this market segment.
The focus strategy on its own is not enough, so a company has to decide whether to pursue a differentiation or cost strategy once it decides to adopt the focus strategy.